Should you follow Bob Diamond and invest in Africa?

Africa has bags of potential

I’m no fan of Bob Diamond. I suspect you aren’t either.

But I can’t deny that he built a significant investment banking business for Barclays, and became very rich in the process.

So when Diamond successfully floated a new African banking cash shell last week (you can read more about that here), my interest was piqued.

Should I follow his lead and invest in Africa too? And if so, how?

Africa – it’s more than just a commodity story

I suspect that many investors focus on commodities when they consider Africa. That’s understandable. Resources still comprise a large part of the African economy.

However, we are now seeing some real diversification, and that means that Africa is about much more than just mining. Most importantly, incomes in several countries are rising fast.

For example, in Nigeria, average income per head has quadrupled since 2000. That’s led to the emergence of a substantial African middle class who have enough cash to buy consumer goods as well as apply for modern banking products such as credit cards.

Indeed, according to one definition, 30% of Africa’s billion-strong population is now ‘middle class.’

The demographics also look very promising. Currently, more than half of the population is under 20. Africa is expected to have a larger working-age population than China by 2043.

So while the African middle class should continue to grow, there’s also plenty of scope for Africa to become the last large low-wage economy in the world.

As China gets richer and older, and wages rise, I suspect that some manufacturing will move to Africa. Remember that Africa is also a lot closer to Europe than China and Southeast Asia are. In an era of high energy prices, and thus transport costs, that could eventually be a real advantage.

What’s more, Africa is starting from a low base, so there’s plenty of potential to achieve fast growth from here. Indeed Mark Mobius, the best-known emerging-markets fund manager, reckons the African economy should grow at a rate of 7% a year for the next 20 years.

He reckons there are long-term opportunities in IT and solar power, as well as any industries related to the rising power of the consumer. That includes banking, telecoms, food and beverages.

The governance of many African businesses is also improving – many larger companies are now compliant with the global IFRS accounting standard. Some African governments have also become more effective.

Let’s not forget improving infrastructure, either. A correspondent with The Economist recently travelled 600 miles across Tanzania, and at no point did he experience any problems with his mobile phone signal.

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It’s not all rapid growth and optimism

Don’t get me wrong, I’m not suggesting that Africa is a one-way bet. Yes, there have been some improvements, but corruption, violence and poor government are still widespread, and could deteriorate again. You just need to look at South Sudan to see the sorts of nasty problems that can take investors by surprise.

On another front, if climate change proves as serious as some observers suggest, then Africa will probably suffer more than most regions. What’s more, unreliable power and water are another significant problem that is holding back some businesses.

Even if you invest in successful companies, you may get caught out by currency movements. The South African rand has been pretty volatile over the last ten years. On top of that, there’s the issue of liquidity.

Most African stock markets are small. Emerging-markets specialist Ashmore says that the value of investable companies outside Africa is just $250bn, smaller than the Danish stock market.

Because most African stock markets are so small, a large investor can trigger big share price falls if it tries to exit a particular stock. This lack of liquidity was one reason why New Star shut its Heart of Africa fund in 2009, just 15 months after the fund was launched.

Given this liquidity issue, any investment in Africa has to be for the long-term.

Diamond’s got a point though

However, in spite of the many problems, I can see why Diamond is investing in Africa. I can also see that banking could be a good way to play this growth story. After all, only a quarter of the African population has a bank account, while only one in 20 has a credit card.

Just remember that the risk here is high. So if you’re tempted to invest in Africa, keep it to a sensible proportion of your portfolio.

I’d also suggest that you don’t invest via an ETF (exchange traded fund.) I’m normally a fan of such passive funds, but in a region like Africa where markets are small and liquidity is poor, I think there are good opportunities for good, old-fashioned stock pickers.

My favourite African investment fund is the Renaissance Pan-African fund, which is managed by a highly-regarded manager called Sven Richter. He worked with Mark Mobius at Franklin Templeton for many years and has delivered strong performance in recent years.

However, the big downside is that the fund has a 2% annual charge.

You could reduce the risk somewhat by going for a fund that doesn’t just invest in Africa. The Fidelity Emerging Europe, Middle East and Africa fund has grown 140% over the last five years and its manager, Nick Price, has a Citywire ‘AA’ rating.

The annual management charge is 1.5%. Currently 45% of the fund’s assets are in Africa, so you’re getting some decent African exposure without going all in.

My colleague David C Stevenson also looked at some options for Africa recently.

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2 Responses

  1. 24/12/2013, Sage of Aldershot wrote

    Season’s greetings, Ed, and thanks a lot for the informative articles. I recently visited Namibia and saw the ‘middle class’ thing for myself. It’s a great country with lots of happy people there. Investment, or a holiday there, are strongly recommended. There are a lot of opportunities.

  2. 30/12/2013, Orb wrote

    “30% of Africa’s billion-strong population is now ‘middle class.’” yet only 25% have a bank account? And just 5% a credit card?

    Those figures don’t stack up for me. One only has to look at the security & behaviour of Zuma and the crowd at Icon Madiba’s funeral to see that even in (what used to be?) Africa’s most advanced economy, the masses are more threatening than we might like to think! And that’s before we get onto Malema & his freedom fighters (aren’t they free then? And why ‘fighters’?)

    I look at the mess Diamond made of Barclays and wonder how much more of a mess he could make with anything else; after all, he just collects his fees from the fund and who cares how it all ends!

    Timing is everything! There’s plenty more fish in the sea.

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